Basic Development Concepts
Economic growth is an increase in the level of production in a country or region. This also refer to the output of a country, and is measured by the gross national product (GDP). Economic development is formally defined as the process of moving from a situation of poverty and deprivation to a situation of increased production and plenty, through investments and changes in the organization of work.. Less developed (developing) countries tend to produce primary goods (commodities, such as agriculture), whereas more economically-developed countries tend to produce secondary goods (manufactured/ processed goods) and tertiary goods (services). Economic development refers, generally, to social progress. It implies an improvement in, for example, the standard of living--the human condition, in a short cliche. For development to occur, there must be a change in the way that goods and services are produced, not only in which goods and services. This is in contrast to economic growth, which generally applies only to quantitative growth and is often measured in the change in GDP over time. Economic development typically involves improvements in a variety of indicators such as literacy rates, life expectancy, and poverty rates. GDP does not take into account other aspects such as leisure time, environmental quality, freedom, or social justice; alternative measures of economic wellbeing have been proposed. A country's economic development is related to its human development (also known as human capital), which encompasses, among other things, health and education. Therefore a person will have a lot of human capital if they have a high level of education and are still young and healthy. But if the person is old, they can have a high level of education and still have a low human capital because they are old and their health is not very well. Also a newborn will not have a very high human capital because even though they are young and quite healthy, they have little or no level of education, therefore their human capital is also very low. Gross Domestic Product (GDP) versus Gross National Product (GNP) as measures of growth Gross Domestic Product (GDP) is the total market value of all final goods and services produced within a country's borders in a given year. Gross National Product (GNP) is the total market value of all final goods and services produced by a country's citizens in a given year. GDP is calculated using the formula GDP = Consumption + Investment + Government Spending + (Exports − Imports). GDP= C+ I+ G+ (X-M) GNP is found using the formula GNP = GDP + NR (Net income from assets abroad; Net Income Receipts) or GNP = GDP + Foreign Investment Gains - Domestic Income Lost to Abroad. GNP and GDP can be compared to see how a country's exports compare to it's local economy. GDP is sometimes used to estimate a country's local business while GNP is usually used to analyze a country's economic strength. WORKS CITED: http://www.diffen.com/difference/GDP_vs_GNP Limitations of using GDP as a measure to compare welfare between countries GDP per capita (per person) is often used as a measure of a person's welfare. Countries with higher GDP are more likely to score highly with other measures of welfare such as life expectancy. However, there are limitations to the usefulness of GDP as a measure of welfare. Comparison of GDP from one country to another may be distorted by movements in exchange rates. GDP can not measure a person's happiness, since money does not buy happiness. Some goods that money can buy bring happiness, however even though one is financially well off does not mean that a country can be easily compared to another country in terms of happiness. You must consider purchasing power. Additionally, limitations of using GDP includes the lack of consideration of: '-Grey and Black Market Goods' -'Environmental Impacts' -'Non-Market Goods' (i.e. subsistence farming and housework) -'Stocks and bonds' -'Used goods' -'Basic Quality of Life' -'Sustainability' -'Foreign Workers' -'Inequality' Allowance for differences in purchasing power when comparing welfare between countries' ' When comparing how well off two different countries are in accordance to each other, purchasing power must be considered. Purchasing power describes how much a person from one country can buy in their country versus how much they can buy in another country. For example, in the U.S. one hamburger costs one dollar, but if someone from the U.S. were to exchange that dollar for a foreign currency and try and buy one hamburger at McDonald's, they might find out they could buy more than one hamburger. A higher income country usually has a higher purchasing power than other lower income countries, and usually has higher welfare. An index derived from real data called the Big Mac Index is a way of seeing how countries relate in purchasing power, because the Big Mac is practically the same everywhere you go and is sold everywhere. Alternative methods of measurement Human Development Index (HDI): Factors in many different measures that contribute to welfare, so is one of the most accurate measurements in figuring out which countries have better qualities of life than others. Gross National Happiness (GNH): measures quality of life by looking at psychological well-being, health, education, culture, and living standards. Poverty Line: The minimum level of income deemed necessary to achieve an adequate standard of living in a given country. Gini coefficient: A number between 0 and 1, it is the ratio of the area that lies between the line of equality and the Lorenz curve over the total area under the line of equality. It is measurement of income distribution, an important factor in determining a country's growth and development. Problems of measuring development Every day, money is flowing through the economy, so it's near impossible to keep track of every penny that goes in and out of the country. Also, a country may or may not meet all the requirements of being developed like: 1) a strong govenment, 2) a strong society, and 3) strong institutions. Strong institutions are the most important factor in the potential for a country to become developed. Also, the methods of measuring development have never really worked in reality. Therefore it is hard to measure devlopment since there are so many things that make up the economic system of a country. A country that has a very big black market also may appear as though it is not doing as well as it actually is. It's hard to keep track of the money because there are so many ways it can be spent, that is all too hard to keep track of. Having to keep track of all those things will be too much work and expensive to keep track of too. That is why GDP is not a great measurement on how well a country is actually doing. Also one individaul, or a very small group of people could be in control of a large percentage of the money. GDP per capita is better than just regular GDP, but still not as good of an indicator as things like HDI and GNH.